You have probably heard this term over and over in your journey of learning how to trade. I am guilty of it too. Buying and selling without confirmation (cue dramatic music). But, what does this really mean? Is price action confirmation the same on intraday time frames as it is on daily/ weekly charts? I will attempt to answer this question and in fact it is very simple.
Lets look at a fast time frame on a recent runner $ACHV…
Before my new understanding on confirmation price action, I would have thought “Oh, it rejected $4.20 now we are on the back side of the move” and probably have moved on from the stock. Understanding the theory that on fast trading time frames (1, 5, 15 minute ect.) multiple tests of an area of resistance is actually weakening the resistance and strengthening the probability of a break. Had the price action blew right through the 20ema (yellow line) I would not feel the same about the chart pattern. However the multiple weakening of the resistance and finding support provided a huge opportunity for profit. (“Buying the dip” is still a controversial subject for me but expect more on it in later posts because I have been seeing a pattern lately that supports this strategy. Before, my mentality as why buy a stock when its price is weak who is to say it wont just continue down? But that is for another day)
Daily Confirmation Theory
DI am going to use the $SPY for this example because it is a ticker I follow religiously.
So the theory in question here states that multiple test on a daily time frame strengthens the zone of resistance/support. Looking at the daily chart of the $SPY below we see it test the resistance line 4 times. In theory we should see rejection off this area in the days to come because the more times we test the line the stronger the resistance and the weaker the probability of a break.
The same can be said for support. On a daily time frame the theory is that the more times a support line is tested the stronger is becomes. On an intraday time frame, however, the more times a support line is tested the weaker it becomes. I feel it is easy to confuse these in different trading aspects. It is important to combine the two theories when day trading because it can save you from buying resistance and selling support.